In recent years, rising tax revenues and falling interest rates have boosted the fiscal position of many German municipalities. However, the Covid-19 pandemic threatens to reverse this positive trend. Our study "Kommunales Zins- und Anlagemanagement in Zeiten digitaler Plattformen" (municipal interest rate and investment management in times of digital platforms), which the KOWID (Centre of Competence for Public Economy, Infrastructure and Public Interest) at the University of Leipzig conducted in collaboration with ING, komuno and Giro Solution (Sparkassen-Finanzgruppe) shows the challenges facing municipalities in relation to interest rate and debt management and the role that digital brokerage platforms will play. The study was sponsored by the Deutscher Städte- und Gemeindebund (German Association of Towns and Municipalities).
Many municipalities are already concerned about financial flexibility when it comes to liquid cash. For example, more than half of the municipalities surveyed said they had limited financial flexibility in the medium term, and a fifth said they had no room for manoeuvre. The willingness of municipalities to take up investment loans is correspondingly high. More than 74 percent of the municipalities surveyed want to borrow to a greater extent than in the past five years. This is further facilitated by the favourable interest rate environment.
The consequences of the low interest rate environment
The low interest rate environment ensures that local authorities can save on interest expenses, but on the other hand, interest income from investments in financial assets is low. Two-thirds of the municipalities nevertheless see the situation as positive. The interest savings they can achieve by restructuring long-term liabilities outweigh the disadvantages in this case. This shows that long fixed interest periods are preferred depending on the total debt of a municipality. The higher the level of debt, the more interested municipalities are in longer fixed interest periods.
Investment management for financial assets
Less than a quarter of the municipalities surveyed experienced a significant loss of assets as a result of the current low interest rate environment. Cities with a firm investment policy are experiencing approximately twice as many losses as cities without a firm investment policy. This could be because the policies limit investment opportunities, resulting in lower returns. On the other hand, it could also be related to the financial assets that the municipalities have. Municipalities with firm investment policies have more financial assets on average, resulting in greater overall losses. As a response to the loss of assets, the municipalities primarily use risk-averse strategies such as long-term investments or fixed-income investments. In particular, municipalities with greater assets are increasingly using sustainable investments.
Credit and brokerage platforms are growing in significance
The study shows that online brokerage platforms are growing in significance, especially among municipalities with a high level of debt, which use them to broaden their room for manoeuvre. Even though around a third of the municipalities surveyed already use brokerage platforms of this kind, the lack of demand is still preventing them from becoming widespread. The quality of services or lack of awareness of the benefits of the platforms, on the other hand, only play a minor role. For municipalities, the main advantages of brokerage platforms are greater access to lenders, time saving opportunities and more favourable credit conditions.
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